. At the end of their useful lives alternatives A and C will be replaced with identical replacements (the repeatability assumption) so that a 20-year service requirement (study period) is met. Which alternative should be chosen and why b. Now suppose that at their end of their useful lives, alternatives A and C will be replaces with replacement alternatives having an 8% internal rate of return. Which alternative should be chosen and why? Consider these mutually exclusive alternatives. MARR = 8% per year, so all the alternatives are acceptable. Alternative B $425 $49.92 Capital investment (thousands) Uniform annual savings (thousands) Useful life (years) Computed IRR (over useful life) A $280 $45.57 10 10% 20 10% $550 $145.09 5 10%

. At the end of their useful lives alternatives A and C will be replaced with identical replacements (the repeatability assumption) so that a 20-year service requirement (study period) is met. Which alternative should be chosen and why b. Now suppose that at their end of their useful lives, alternatives A and C will be replaces with replacement alternatives having an 8% internal rate of return. Which alternative should be chosen and why? Consider these mutually exclusive alternatives. MARR = 8% per year, so all the alternatives are acceptable. Alternative B $425 $49.92 Capital investment (thousands) Uniform annual savings (thousands) Useful life (years) Computed IRR (over useful life) A $280 $45.57 10 10% 20 10% $550 $145.09 5 10%

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.4IP

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Ten years ago, Johnson Recovery purchased a wrecker for $330, 000 to move disabled 18-wheelers. He received a salvage value of $25, 000 after 10 years of use. During this 10-year period, his average annual revenue totaled $60, 000. a) Did he recover his investment at 12% per year return? In other words, does the Annual Equivalent Value of the benefits exceed the Capital Recovery cost at an interest rate of 12%? b) Suppose Johnson moves, on average, 250 disabled 18-wheelers each year. What is his average equivalent benefit/cost per vehicle moved? c) Now, incorporate annual operating and maintenance costs into your analysis. If the annual O&M cost was $5, 000 the first year and increased by a constant 10% per year, what is the annual equivalent worth at 12% per year?
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A man is considering putting up his own enterprise, where an investment of 800,000 will be required and will take 15 years to recoup. He estimates his annual sales at 800,000 along with the following operating costs. Materials =160,000/ yearLabor = 280,000/ yearOverhead = (40,000 + 10% of sales)/ yearSelling Expense = 60,000/ yearThe man will give up his regular job paying 216,000 Php per year and devote all his time to the operation of his business, this will result in decreasing his labor cost by 40,000 per year, material cost by 28,000 per year and overhead cost by 32,000 per year. If the man expects to earn at least 20% of his capital, should he invest? Solve using a) Rate of return method b) annual worth method c)present worth method d)equivalent uniform annual cost method
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